Brussels Criticizes Apples Irish Tax Deals - Essay Example

Running header: Tax Avoidance Student’s name: Instructor’s name: Subject code: Date of submission Content and views of the articles Brussels criticizes Apple’s Irish tax deals The first article is about the European Union claim that the Irish government provided special tax treatment for a multinational company Apple company limited for it to establish its operations in Ireland. The EU claim is that the Irish government gave Apple favorable and potentially illegal terms which were prompted by employment considerations in 1991. As such, EU is of the view that the benefits that accrued from such treatment to Apple company would need to be recouped in form of penalties that would amount to billions of Euros since tax margins were negotiated ‘Reverse engineered’ without economic regard and were tied to concern about jobs that should not have influenced the implementation of tax law. According to EU, the tax advantage was also granted in a selective manner. However, the company denies the existence of such a deal over jobs with Irish government and that the company’s success is purely out of hard work and not for being treated better than other companies. The same view is held by the government that Apple has not been treated preferentially and that it has always complied with its tax obligations. In essence, the issue considered in the article is whether it is right for governments to provide special tax treatment for multinationals which the EU seems to consider wrong. The curious case of corporate tax avoidance: Is it socially irresponsible? The second article examines whether paying of taxes by companies is part of their corporate social responsibility which would mean that tax avoidance is socially irresponsible. The article is introduced by defining CSR as the act of companies abiding by the laws of the land in which they operate and poses questions as to what abiding by the laws actually imply and if this be the case, would CSR also involve paying of corporate taxes? The relationship between paying of taxes and CSR is explored at length using various schools of thought with some supporting it while others reject it on either moral, social or political grounds. While the social norm theory suggests that Tax avoidance would not be considered right and just from the public point of view since it implies cost to the society, the other theory do not view paying of corporate tax as part of CSR and hence tax avoidance is legal through rules lawyering or creative compliance. The view is supported from financial responsibility perspective which views tax as a cost to be avoided unlike social responsibility which views tax avoidance as adding economic burdens to other people. The paper also looks at the costs of tax avoidance as well as its justification. Some examples of companies who practice tax avoidance are outlined as well as good practices. The article also examines paying taxes as a reputation preserving measure by companies. In conclusion, it seems that the author is against the various means of tax avoidance used by companies to minimize the tax paid. The author seems to take the social responsibility view which treats tax avoidance as irresponsibility. Whether it is ethical for multinational corporations to arbitrage countries by their corporate tax rates Tax arbitrage can simply be regarded as the act of multinationals of creating stateless income by way of moving taxable income within a multinational group from high tax to low tax countries without shifting the location of externally supplied capital or productive activities . This implies that such a multinational’s profit is subjected to tax in a jurisdiction which is not directly related to where the transaction occurred, where value was created or where the company is domiciled. Ordinarily, one would think that the profit would be taxed where it was generated. However, this turns out not to be the case. In effect, tax arbitrage results in companies paying less tax than the fair amount they are supposed to pay to the national government. But is it ethical for multinational corporations to arbitrage countries by their corporate taxes? The issue of tax arbitrage is a moral issue with some seeing no problem with it while others see it as an ethical (Ghemawat and Ghadar, 2000). For instance from the MNCs management’s view, arbitrage of countries by their corporate tax rates is seen as an ethical way of playing their responsibility of maximizing the value they deliver for their shareholders which should include keeping tax costs at their minimum within the precincts of what is legal. However, I take the public and shareholders view of tax arbitrage by multinationals to argue that it is unethical for multinational corporations to arbitrage countries by their corporate tax rates in this case. The governments world over impose taxes with an aim of providing essential services to the public. As such, when multinationals arbitrage countries by their corporate tax rates, they deny the public the chance to be provided with such services by their governments. For instance, Chris (2014) notes that US multinationals such as Google , Apple etc shelter substantial profits in tax havens and have stashed approximately $1.9 trillion in the tax haven which if taxed would be used in provision of such services. On the one hand, MCNs which pay a fair amount of tax in the countries where they operate engage in an ethical practice and are seen as doing a responsible thing for the social good by way of providing the government with funds with which to provide public services including healthcare, education and investment in public infrastructure. On the other hand, it is the public that suffers when companies or MCNs fail to remit their fair amount of taxes to the government through government’s reduced spending. This is seen in terms of increased cost of living and increased unemployment since the government would have little money to invest in job creation. It is also the public suffers when the government cannot meet its tax targets though increased taxation if the government is to meet its taxation targets. From the public point of view therefore, it is unethical for multinational corporations to arbitrage countries by their tax rates since they deny the public essential goods and services that are supposed to be provided by the government through taxes. As stated above, tax arbitrage is a form of tax avoidance which is a harm to corporate reputation and is hence unethical from the shareholders point of view. As tax arbitrage activities by multinationals become more publicized and stigmatized, such multinationals are likely to have negative reputation which would lead to consumers shunning their products which would affect their profitability. Furthermore, their share prices would decline to the detriment of shareholders. In this regard therefore, shareholders would treat such behavior as being unethical. Although it has been argued that MNCs’ management engage in tax arbitrage in a bid to maximize shareholder value, such act is highly likely to encourage the management to engage in other subversive activities that are not in the interest of the shareholders. Such acts would include managerial malfeasance as was witnessed at Xerox, Enron and Tyco. The drive to limit taxes through arbitrage and other means would give rise to manipulation of accounting profits and managerial malfeasance to the detriment of shareholders. As such, from the shareholders point of view as well as that of the public, I would deem it as unethical for multinational corporations to arbitrage countries by their corporate tax rates since it produces undesired results to the stakeholder groups. The social, economic and moral implications of the fact that some national governments provide special tax treatment for multinational corporations (MNCs) Governments across the world offer lower tax rates on multinationals with an aim of boosting their competitive edge and hence spur economic growth and job creation in such countries. However, such actions whether desirable or undesirable have social, economic and moral implications on such nations as is discussed below. On the social front, such a move to offer lower tax rate to multinationals is supported on the basis that it would lead to job creation which would boost the social status of the individuals concerned. In this regard, governments especially in developing world expect that the smaller rate of tax would act to attract the MNCs to establish business in such nations. Owing to the ever growing number of youths in such nations and the high level of unemployment, such a move has an effect of alleviating poverty through job creation. Though, the public also loses through the reduced tax and hence provision of essential services, it would be better to have such a multinational establish operations and create many jobs while paying less tax rather than have it skip the country for another one that offers a lower tax rate to it. On the economic front, such a move would have the desirable effect of economic growth. This is because new jobs will be created while businesses will also be established to offer services and goods required by the MCNs as well as those employed. This would lead to economic growth bearing in mind the increased tax collection. For the parent countries of multinationals, the reduced tax rate helps tackling the problem of tax arbitrage by encouraging companies to take advantage of the lower tax rate to bring all profit home rather than stash it in tax havens. The end result is that the government would end up collecting more taxes while all the profit would be brought back home. When the profit is brought back home, it will be spent at home thus spurring economic development as opposed to supporting the economies of tax havens where such profits would otherwise be stashed. On the moral front, it is worth noting that the reduced tax burden will be shifted to other parties probably through increased tax rates or reduction in government spending. This is deemed unethical since it is argued that the company owes its existence to the state, and then it should aid the government in providing the essential services through paying tax in accordance to its ability. As such, paying less tax than is supposed to be the case is socially irresponsible and unethical on moral grounds as it has the implication of shifting the reduced tax burden to other parties. In addition, charging less tax to multinationals has an implication of unfairness. It is unethical for the authorities to charge different tax amounts for two similar businesses that operate in the same environment and with similar amounts of profits. This has the implication of handing undue advantage to the multinationals over local companies thus making them more competitive and more profitable (Hill, 2014). This is because the saved taxes implies more profits which can be used in marketing and expansion of the business an advantage that local companies that are not multinationals don’t have. In the final analysis, this might even have the effect of killing the smaller companies since they would even have to offer higher prices owing to the bigger tax burden. On the other hand, the multinationals would always take advantage of the reduced taxation to even lower prices which thus disadvantaging the smaller companies. Thus from the moral point of view, providing special tax treatment for multinational corporations is unethical since it is unfair and hence has the implication of providing uneven working environment between multinationals and other companies. Whether there should be more international coordination to combat tax avoidance by MNCs Owing to increased acts of tax avoidance especially through tax shifting and tax arbitrage there is need for increased international coordination to combat this vice. This is because the growth in tax avoidance has very substantially grown in the recent past. For instance, the EU estimates that combined with tax evasion, this constitutes massive tax losses estimated at 1 trillion Euros annually. This amount could be bigger in the US while the recent Africa progress report found that Africa loses more from profit shifting than it receives in foreign aid in the name of tax avoidance. As can be seen therefore, tax avoidance is global and hence the need to cooperate in combating it. One of the reasons for increased cooperation is the fact that tax avoidance has been facilitated by globalization, financialisation, and the growth in trade, the digital economy as well as the rising capital’s share of national income as well as absence of political will for addressing the vice. It should be noted that though capital is global, taxation rules have remained national and hence tax avoidance has thrived and flourished owing to lack on information on capital flows and asset ownership internationally, lack of automatic exchange of taxation data between administrators as well as since individual governments lay more emphasis on tax competition as opposed to tax cooperation as well as more on administration as opposed to investigation. Concerted international action on tax avoidance would however result in increased economic growth, fairness, and employment as well as tax revenues if it is done with vigor (Fremeth and Richter, 2011). This will see the shifted taxes and hence increased tax revenue that will be crucial in funding public services, financing social security and combating poverty and hence better living conditions throughout the world. It is worth noting that tax havens play a great role in promoting tax avoidance. As such, one area of corporation should be in tackling tax havens which will be a great step towards combating tax avoidance. For instance, no nation should allow their banks or the foreign banks operating locally to have any subsidiaries or affiliates in the tax havens. If they do, their licenses should be withdrawn while those MCNs who exploit tax havens should either be banned from operating in a nation or be banned from public contracts. The so called tax havens and tax avoidance schemes have also been promoted by tax competition between states. tax competition also leads to reduced tax rates , incentives/loopholes, exemptions and reduced effective tax rates for MCNs. As such, increased coordination in tax policy in a bid to ensure that companies pay tax where they make profits as well as a compulsory requirement for common consolidated corporate tax base of say 25% would be important in preventing tax avoidance through profit shifting. Tax avoidance has also been facilitated by transfer pricing and lack of information sharing among nations regarding capital and income flows. As such, there is need for increased cooperation to enable information and data sharing regarding the operations of multinationals including their profitability and capital ownership and flows. There should thus be public disclosure of country by country tax reporting by MNCs as well as the taxation of shadow banking and private pools of capital which should be facilitated by the establishment of an international infrastructure regulation body. In addition, nations need to establish measures of addressing tax and the digital economy since a lot of tax avoidance happens in the digital economy. The above are just some few areas where nations need to cooperate in a bid to tackle tax avoidance and it is hoped that cooperation along those areas will be highly effective in tackling the vice. References: Ghemawat, P& Ghadar, F2000, The Dubious Logic of Global Megamergers, Harvard Business Review, July-August, 65-72. Hill, C2014, International Business: Competing in the Global Marketplace, Global Edition, McGraw Hill Fremeth, A& Richter, B2011, Profiting from Environmental Regulatory Uncertainty, California Management Review, 54, 1, 145-165. Read More